Asia > Eastern Asia > China > The gas transaction announced last week saw agreement between Russia and China next 10 years of negotiation

China: The gas transaction announced last week saw agreement between Russia and China next 10 years of negotiation

2014/05/28

The gas transaction announced last week saw agreement between Russia and China next 10 years of negotiation. The implications of Russia's turn eastward to seek a new energy partner should raise concerns in Europe over its own gas supply and wider energy security.

Gazprom's share of Europe's gas market reached approximately 30% in 2013. As the Ukraine crisis has soured relations between Russia and Europe, both sides are looking to diversify.

Europe's need to diversify away from Russian gas is hardly new. Russia's tendency to use gas as a political tool to put pressure on Ukraine and Europe has demonstrated the risks of relying on one partner. Additional globally, growing concern around climate change and its impact on national security as a "threat multiplier" has lent support to the world's reduced use of fossil fuels. From presently on events in Ukraine and the Sino-Russian gas transaction have accelerated the urgency with which Europe needs to seek new energy sources.

We still have some time to do so. Despite the transaction with China, Russia in the short term will continue to need the European market. The 38bn cubic metres it plans to export to China is small compared to the 161.5bn cubic metres it exported to Europe in 2013. It is likely that China received some concession on price, given that this was the major sticking point delaying the transaction since the discussions began, but it means that Russia's exports to China will not replace the revenue Russia relies on from its European exports. Russia will as well have to pay to build the pipeline infrastructure to China, and gas will only be transported from 2018.

But there is no doubt that, in the long term, Russia gains the upper hand in pipeline politics over Europe by engaging with an alternative gas partner. It may threaten to divert gas earmarked for Europe to China. In theory, this may be an blank threat, given that even the optimum target capacity of 60bn cubic metres to China is still low compared to Russian exports to Europe. But even so, any leverage Europe had in such gas disputes with Russia will diminish. Ukraine and eastern Europe would suffer most from this decline given Ukraine's current instability. Ukraine seems unlikely to recover its political relations with Russia.

The challenge for Europe is that there is no single alternative that could fully displace Russia's supply volumes or match its price. Developing alternative sources will take time. Liquid nitrogen gas is an option available from a number of sources, namely Qatar, Nigeria and the US, but the cost of importing it will be higher than the cost of importing gas, and new infrastructure will be required to receive shipments.

Renewable energy is attractive from an energy security perspective, but it is not reliable and will not produce quantities comparable to fossil fuels. Azerbaijan and, additional promisingly, Turkmenistan are options. But this will not satisfy European request in full and is only set approaching online for Europe in 2019. Shale gas is a potentially powerful alternative, but it comes with its own challenges. Governments have faced social turmoil against fracking at home; France and Bulgaria have banned it. Reserve estimates can turn out to be underwhelming, as seen in Poland.

Given its position as a gas exporter, Russia was able to act quickly in diversifying its customer base by turning to China. As a gas customer, Europe does not have this flexibility. From presently on Europe can learn from the expediency with which President Putin reacted to the shifting political and economic landscape in the wake of Ukraine to sign a transaction with China. A blend of alternative energy sources for Europe will no doubt cost additional, but Europe's energy security depends on diversification along these lines.

Europe is unlikely to become completely free from Russian gas in the near next. But it is a security risk to rely too much on one partner and it makes sense to have less energy dependence on Russia, or on any one energy source. Less energy interdependence with Russia would probably benefit both sides. For security reasons, it would certainly benefit Europe.

Related Articles
  • China crude oil imports shatter record, top U.S. intake

    2017/04/15 BEIJING, April 13 China's crude oil imports surged to an all-time high in March to nearly 9.2 million barrels per day (bpd), customs data showed on Thursday, far surpassing expectations and overtaking the United States as independent refiners ramped up their purchases. The March imports came in at 38.95 million tonnes, or 9.17 million bpd, according to the General Customs Government. That compared with 8.286 million bpd in February and far exceeded an before record of 8.57 million bpd in December. Both the March and the initial-quarter import levels were above those of the United States according to data from the U.S. Energy Data Government (EIA), making China the world's top crude oil buyer so far this year.
  • Chinese Consumers Will Change the Global Economy

    2017/04/10 The media is full of talk of China’s economic slowdown, as its GDP increase, in double figures for decades, presently hovers at around 6-7 % according to official figures. But while China’s economic slowdown is real, the increase of the Chinese consumer as a powerful force on the world stage shows little sign of abating and in fact will become additional pronounced someday. By 2020 there will be almost 400 million of what management consultants McKinsey call “mainstream consumers” – consumers with household incomes of $16,000 to $34,000 and therefore part of the “middle class.” It is these consumers that will shake the world. China’s government is committed to transitioning the country’s economy from an investment -led to consumption-led. Beijing knows that the sources from which it has completed such impressive increase in the last few decades – investment , cheap exports, and rural-to-urban migration – can no longer drive GDP increase as much as they once could and that it must find new sources of economic activity.
  • Despite Political Worries, Asia Still World’s Economic Powerhouse

    2017/04/10 Asia is set to remain the world’s biggest contributor to world increase in 2017, with activity picking up in two-thirds of the region’s developing economies, according to the Asian Development Bank (ADB). The increase outlook has reassured investors amid rising geopolitical tensions in the world’s most economically dynamic region. In its “Asian Development Outlook 2017,” the Philippines-based organization predicted gross domestic product (GDP) increase for Asia and the Pacific of 5.7 % this year and next, a slight drop from last year’s 5.8 %, despite stronger external request, improved commodity prices, and domestic reforms.
  • China offers concessions to avert trade war with US

    2017/04/10 High quality world journalism requires investment . Please share this article with others using the link below, do not cut & paste the article. See our T&Cs and Copyright Policy for additional detail.    China will offer the Trump government better market access for financial sector investments and US beef exports to help avert a trade war, according to Chinese and US officials involved in talks between the two governments. High quality world journalism requires investment . Please share this article with others using the link below, do not cut & paste the article. See our T&Cs and Copyright Policy for additional detail. 
  • Xi, Trump pledge to expand win-win cooperation, manage differences

    2017/04/10 Chinese President Xi Jinping and his U.S. counterpart, Donald Trump, pledged on Friday to expand mutually beneficial cooperation and manage differences on the basis of mutual respect. Xi made the two-day trip to the southeastern U.S. coastal town of Palm Beach for the initial conference with Trump, in a bid to chart the course of bilateral ties in a new era.